By FERNANDO NOGUEIRA DA COSTA*
The social-developmentalism of pro-worker left-wing economists and the new-developmentalism of pro-industrial economists
Luiz Carlos Bresser-Pereira and Tiago Porto commented: “Edmar Bacha has the merit of discussing the Dutch disease. This is a topic that Brazilian economists, both right-wing and left-wing, seem to want to avoid like the devil runs away from the cross” (Economic value, 02/09/24).
As I have done for years, I will provide further explanations here about the different perspectives between the social-developmentalism of pro-worker left-wing economists and the new-developmentalism of pro-industrial economists.
The classifications “wage-led” (led by wages) and “export-led” (export-led) refer to two distinct types of economic growth regimes. Each has specific characteristics that determine how growth is driven in an economy.
In an economy wage-led, economic growth is driven mainly by the increase in real wages. It generates a positive effect on domestic aggregate demand.
Among the main defining conditions of this type of economy, we highlight the fact that workers, in general, have a higher marginal propensity to consume compared to capitalists or capital holders. When wages increase, there is a more significant growth in consumption, boosting aggregate demand.
The economy depends on a large domestic consumer base, such as that existing in a country with 212,6 million inhabitants, capable of responding positively to wage increases. Household consumption represents a substantial share of GDP: from 1995 to 2023, the annual average was 62,7%.
In a regime wage-led, economic growth does not depend heavily on exports. This is usually the case in large, relatively closed economies, where domestic demand is the main driver of growth. In the same period, exports grew from 7,5% to 18,1% of GDP and imports from 9,5% to 15,7% of GDP, that is, trade flows doubled from 17% to 33,9% of GDP!
Social developmentalism advocates an organized labor market. Strong unions and public policies must guarantee collective bargaining, which is important to obtain wage increases capable of sustaining demand.
Governments with hegemony of a party of labor origin, in economies wage-led, adopt policies to promote income redistribution, such as increases in the minimum wage, social benefits and a progressive tax policy on higher incomes, to strengthen workers' purchasing power.
New developmentalism advocates the transformation of the Brazilian economy into export-led, like those of the Asian Tigers, although it is far from GVCs (Global Value Chains). Imagine economic growth being driven mainly by increased exports, generating a larger trade surplus (US$ 98,8 billion in 2023) and greater accumulation of foreign exchange reserves (US$ 355 billion).
He does not realize the vicious circle. Some exporters have large foreign shareholdings and will remit profits obtained from exports abroad, generating a deficit in the current account balance and a greater need for FDI (Direct Investment in the Country) to balance the balance of payments with progressive economic denationalization.
The economy export-led It needs to be highly competitive in the international market, with a production base with technological innovation not available in Brazil and relatively low costs, i.e., a high exchange rate/salary ratio. Thus, the country's products and services would be attractive in foreign markets.
In this new developmentalist project, growth would depend on external demand, and exports would have to represent a more substantial part of GDP. Economies export-led have a high elasticity of export demand, that is, export growth responds strongly to global economic conditions, including volatile exchange rates commodities.
New developmental economists defend the policy makers Brazilians are adopting exchange rate policies to keep the national currency relatively undervalued, making industrial exports more competitive – and even more so agricultural and mineral and oil extraction. In addition, they are considering granting subsidies or direct incentives to the industrial export sector.
How will the independent Central Bank of Brazil react to the inflation control target? Will it change the exchange rate policy, making “dirty” interventions in the flexible exchange rate regime to the benefit of industrialists and to the detriment of workers in the face of higher imported inflation?
This project would require greater investment in export infrastructure. The government and the private sector would have to invest heavily in infrastructure to support exports, such as ports, highways, and logistics centers, as well as promote favorable trade agreements.
It would be worse socially and politically, in a regime export-led, there should be a moderation or containment of wage growth to maintain price competitiveness in the international market. This would limit the growth of domestic demand, with the economy relying more on exports to sustain growth.
Brazilian industry is not integrated into Global Value Chains, except for the automobile industry in northern Argentina. It does not have important production segments focused on competitive sectors in international trade, such as high-tech manufacturing, commodities or specialized services.
In practice, economies are not purely wage-led ou export-led, but they can exhibit characteristics of both regimes in different contexts. For example, the pragmatic orientation of the denationalized Brazilian economy is influenced by the economic policy that seeks to also satisfy foreign investors with a strategy of exploiting the domestic market.
Expansionary fiscal and monetary policies make the economy more wage-led, while policies aimed at external competitiveness would favor a regime export-led. Over time, the Brazilian economy may transition from one regime to another, due to structural changes, such as globalization, technological innovations or changes in income distribution – and not because of an untimely exchange rate policy that is inadequate to combat inflation.
In fact, the economies wage-led e export-led are not mutually exclusive. A pragmatic orientation of the Brazilian economy can stimulate domestic demand (wage-led) and, at the same time, explore external markets (export-led) to maximize growth.
To determine whether an economy is wage-led ou export-led, it is necessary to analyze how economic growth is driven and what are the main drivers of aggregate demand. While an economy wage-led is based primarily on the strength of domestic demand, fueled by rising wages, an economy export-led depends on international competitiveness and external demand to sustain its growth.
Both regimes have their own advantages and disadvantages, depending on how, according to their structural and demographic circumstances, they balance these different forces.
Relevant “detail”: it is a factual error to advocate the diagnosis of deindustrialization due to the “Dutch disease”. In reality, this supposed “deindustrialization” is a myth of industrial lobbyists!
According to IBGE-SCN 1Q24, the relative share of value added at basic prices (disregarding the average of 14,1% in taxes to reach GDP) of General Industry in the sectoral structure of production practically remains around 21,9% from 1995 to 2023. Nor does that of Manufacturing Industry change as much between 1996 (13,1%) and 2023 (13,3%), although it suffered a drop below its historical average (12,4%) in the 2011 to 2020 cycle, when its average share was 10,7%. This cycle was surpassed in the last three years.
Brazilian industry has always been denationalized and without technological autonomy. The strategy of its foreign shareholders aims to exploit the domestic market!
*Fernando Nogueira da Costa He is a full professor at the Institute of Economics at Unicamp. Author, among other books, of Brazil of banks (EDUSP). [https://amzn.to/4dvKtBb
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